Intermediate Chapter 12

Wildcat Baseball Company had a player contract with Carter that was recorded in its accounting records at $5,800,000. Aggie Baseball Company had a player contract with Jeter that was recorded in its accounting records at $5,600,000. Wildcat traded Carter to Aggie for Jeter by exchanging each player's contract. The fair value of each contract was $6,000,000. What amount should be shown in the accounting records after the exchange of player contracts?

Wildcat: $6,000,000 - $200,000 (deferred gain) = $5,800,000. Aggie: $6,000,000 - $400,000 (deferred gain) = $5,600,000.

In 2006, Edwards Corporation incurred research and development costs as follows: Materials and equipment $ 80,000 Personnel 120,000 Indirect costs 150,000 $350,000 These costs relate to a product that will be marketed in 2007. It is estimated that these costs will be recouped by December 31, 2009. The equipment has no alternative future use. What is the amount of research and development costs that should be expensed in 2006?

Expense total of $350,000

A company acquires a patent for a drug with a remaining legal and useful life of six years on January 1, 2005 for $1,200,000. The company uses straight-line amortization for patents. On January 2, 2007, a new patent is received for a timed-release version of the same drug. The new patent has a legal and useful life of twenty years. The least amount of amortization that could be recorded in 2007 is

$1,200,000 - [($1,200,000 ÷ 6) × 2] = $800,000. $800,000 ÷ 20 = $40,000.

During 2007, Bond Company purchased the net assets of May Corporation for $950,000. On the date of the transaction, May had $300,000 of liabilities. The fair value of May's assets when acquired were as follows: Current assets $ 540,000 Noncurrent assets 1,260,000 $1,800,000 How should the $550,000 difference between the fair value of the net assets acquired ($1,500,000) and the cost ($950,000) be accounted for by Bond?

$1,500,000 - $950,000 = $550,000 extraordinary gain

Twilight Corporation acquired End-of-the-World Products on January 1, 2008 for $2,000,000, and recorded goodwill of $375,000 as a result of that purchase. At December 31, 2008, the End-of-the-World Products Division had a fair value of $1,700,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $1,450,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2008?

$1,700,000 - $1,450,000 = $250,000 $375,000 - $250,000 = $125,000.

Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2006 for $10,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $800,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom's market interest rate, is $4,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?

$10,000,000 - [($10,000,000 ÷ 10) × 2] = $8,000,000. Since $8,000,000 > ($800,000 × 8), patent is reported at $4,800,000 (present value of cash flows.

Martin Inc. incurred the following costs during the year ended December 31, 2007: Laboratory research aimed at discovery of new knowledge $180,000 Costs of testing prototype and design modifications 45,000 Quality control during commercial production, including routine testing of products 270,000 Construction of research facilities having an estimated useful life of 6 years but no alternative future use 360,000 The total amount to be classified and expensed as research and development in 2007 is

$180,000 + $45,000 + $360,000 = $585,000.

ELO Corporation purchased a patent for $180,000 on September 1, 2006. It had a useful life of 10 years. On January 1, 2008, ELO spent $44,000 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2008?

$180,000 - [($180,000 ÷ 10) × 1 1/3] = $156,000. ($156,000 + $44,000) ÷ 5 = $40,000.

The general ledger of Vance Corporation as of December 31, 2007, includes the following accounts: Copyrights $ 20,000 Deposits with advertising agency (will be used to promote goodwill) 27,000 Discount on bonds payable 67,500 Excess of cost over fair value of identifiable net assets of Acquired subsidiary 390,000 Trademarks 90,000 In the preparation of Vance's balance sheet as of December 31, 2007, what should be reported as total intangible assets?

$20,000 + $390,000 + $90,000 = $500,000.

Lynne Corporation acquired a patent on May 1, 2008. Lynne paid cash of $20,000 to the seller. Legal fees of $800 were paid related to the acquisition. What amount should be debited to the patent account?

$20,000 + $800 = $20,800.

Maris Corporation acquired a patent on May 1, 2008. Maris paid cash of $25,000 to the seller. Legal fees of $1,000 were paid related to the acquisition. What amount should be debited to the patent account?

$25,000 + $1,000 = $26,000

Fleming Corporation acquired Out-of-Sight Products on January 1, 2008 for $4,000,000, and recorded goodwill of $750,000 as a result of that purchase. At December 31, 2008, the Out-of-Sight Products Division had a fair value of $3,400,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $2,900,000 at that time. What amount of loss on impairment of goodwill should Fleming record in 2008?

$3,400,000 - $2,900,000 = $500,000 $750,000 - $500,000 = $250,000.

Hall Co. incurred research and development costs in 2007 as follows: Materials used in research and development projects $ 450,000 Equipment acquired that will have alternate future uses in future research and development projects 3,000,000 Depreciation for 2007 on above equipment 300,000 Personnel costs of persons involved in research and development projects 750,000 Consulting fees paid to outsiders for research and development projects 150,000 Indirect costs reasonably allocable to research and development projects 225,000 $4,875,000 The amount of research and development costs charged to Hall's 2007 income statement should be

$4,875,000 - $3,000,000 = $1,875,000.

LRF Corporation purchased a patent for $450,000 on September 1, 2006. It had a useful life of 10 years. On January 1, 2008, LRF spent $110,000 to successfully defend the patent in a lawsuit. LRF feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2008?

$450,000 - [($450,000 ÷ 10) × 1 1/3] = $390,000. ($390,000 + $110,000) ÷ 5 = $100,000.

Mining Company acquired a patent on an oil extraction technique on January 1, 2006 for $5,000,000. It was expected to have a 10 year life and no residual value. Mining uses straight-line amortization for patents. On December 31, 2007, the expected future cash flows expected from the patent were expected to be $600,000 per year for the next eight years. The present value of these cash flows, discounted at Mining's market interest rate, is $2,800,000. At what amount should the patent be carried on the December 31, 2007 balance sheet?

$5,000,000 - [($5,000,000 ÷ 10) × 2] = $4,000,000

On January 2, 2007, Klein Co. bought a trademark from Royce, Inc. for $500,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Royce's books was $400,000. In Klein's 2007 income statement, what amount should be reported as amortization expense?

$500,000 ÷ 10 = $50,000.

Distributor Company purchases Supplier Company for $800,000 cash on January 1, 2007. The book value of Supplier Company's net assets, as reflected on its December 31, 2006 balance sheet is $620,000. An analysis by Distributor on December 31, 2006 indicates that the fair value of Supplier's tangible assets exceeded the book value by $60,000, and the fair value of identifiable intangible assets exceeded book value by $45,000. How much goodwill should be recognized by Distributor Company when recording the purchase of Supplier Company?

$620,000 + $60,000 + $45,000 = $725,000. $800,000 - $725,000 = $75,000

The following information is available for Barkley Company's patents: Cost $1,720,000 Carrying amount 860,000 Expected future net cash flows 800,000 Fair value 640,000 Barkley would record a loss on impairment of

$860,000 - $640,000 = $220,000

Shangra-La Company incurred $1,500,000 ($400,000 in 2007 and $1,100,000 in 2008) to develop a computer software product. $500,000 of this amount was expended before technological feasibility was established in early 2008. The product will earn future revenues of $4,000,000 over its 5-year life, as follows: 2008 - $1,000,000; 2009 - $1,000,000; 2010 - $800,000; 2011 - $800,000; and 2012 - $400,000. What portion of the $1,500,000 computer software costs should be expensed in 2008?

($1,500,000 - $500,000) × ($1,000,000 ÷ $4,000,000) = $250,000. $250,000 + ($500,000 - $400,000) = $350,000.

Jeff Corporation purchased a limited-life intangible asset for $120,000 on May 1, 2006. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2008?

($120,000 ÷ 10) × 2 2/3 = $32,000.

Rich Corporation purchased a limited-life intangible asset for $180,000 on May 1, 2006. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2008?

($180,000 ÷ 10) × 2 2/3 = $48,000.

Pesavento Company incurred $3,000,000 ($800,000 in 2007 and $2,200,000 in 2008) to develop a computer software product. $1,000,000 of this amount was expended before technological feasibility was established in early 2008. The product will earn future revenues of $8,000,000 over its 5-year life, as follows: 2008 - $2,000,000; 2009 - $2,000,000; 2010 - $1,600,000; 2011 - $1,600,000; and 2012 - $800,000. What portion of the $3,000,000 computer software costs should be expensed in 2008?

($3,000,000 - $1,000,000) × ($2,000,000 ÷ $8,000,000) = $500,000. $500,000 + ($1,000,000 - $800,000) = $700,000.

Blue Sky Company's 12/31/08 balance sheet reports assets of $5,000,000 and liabilities of $2,000,000. All of Blue Sky's assets' book values approximate their fair value, except for land, which has a fair value that is $300,000 greater than its book value. On 12/31/08, Horace Wimp Corporation paid $5,100,000 to acquire Blue Sky. What amount of goodwill should Horace Wimp record as a result of this purchase?

($5,000,000 + $300,000) - $2,000,000 = $3,300,000 $5,100,000 - $3,300,000 = $1,800,000.

Turner Company's 12/31/08 balance sheet reports assets of $6,000,000 and liabilities of $2,500,000. All of Turner's assets' book values approximate their fair value, except for land, which has a fair value that is $400,000 greater than its book value. On 12/31/08, Benedict Corporation paid $6,100,000 to acquire Turner. What amount of goodwill should Benedict record as a result of this purchase?

($6,000,000 + $400,000) - $2,500,000 = $3,900,000. $6,100,000 - $3,900,000 = $2,200,000

MaBelle Corporation incurred the following costs in 2008: Acquisition of R&D equipment with a useful life of 4 years in R&D projects $600,000 Start-up costs incurred when opening a new plant 140,000 Advertising expense to introduce a new product 700,000 Engineering costs incurred to advance a product to full production stage 350,000 What amount should MaBelle record as research & development expense in 2008?

($600,000 ÷ 4) + $350,000 = $500,000

In January, 2002, Findley Corporation purchased a patent for a new consumer product for $720,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2007 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. What amount should Findley charge to expense during 2007, assuming amortization is recorded at the end of each year?

($720,000 ÷ 10) × 5 = $360,000.

Leeper Corporation incurred the following costs in 2008: Acquisition of R&D equipment with a useful life of 4 years in R&D projects $800,000 Start-up costs incurred when opening a new plant 140,000 Advertising expense to introduce a new product 700,000 Engineering costs incurred to advance a product to full production stage 500,000 What amount should Leeper record as research & development expense in 2008?

($800,000 ÷ 4) + $500,000 = $700,000

General Products Company bought Special Products Division in 2006 and appropriately booked $250,000 of goodwill related to the purchase. On December 31, 2007, the fair value of Special Products Division is $2,000,000 and it is carried on General Product's books for a total of $1,700,000, including the goodwill. An analysis of Special Products Division's assets indicates that goodwill of $200,000 exists on December 31, 2007. What goodwill impairment should be recognized by General Products in 2007?

Since $2,000,000 > $1,700,000, $0 impairment.

Kerr Company purchased a patent on January 1, 2006 for $180,000. The patent had a remaining useful life of 10 years at that date. In January of 2007, Kerr successfully defends the patent at a cost of $81,000, extending the patent's life to 12/31/18. What amount of amortization expense would Kerr record in 2007?

[($180,000 - $18,000) + $81,000] ÷ 12 = $20,250.